How U.S. Stock Market Reacted to Flu Pandemics
BY ALICE CHEUNG
PUBLISHED ON May 5, 2020
The new coronavirus continues to cause wild fluctuations in the stock market, leaving nervous retirees and other investors wondering whether to keep their money in play. That virus, known as SARS-CoV-2, continues to spread quickly. According to the World Health Organization, it has infected more than 2,931,300 and killed 200,300 worldwide. At the same time, the U.S. Bureau of Labor Statistics released its latest report that an additional 4.4 million Americans filed for unemployment last week, which brought its economy to a standstill.
While the news of the coronavirus continues to paint a dire picture, looking at how the U.S. stock market reacted during past flu pandemics may help people to better understand the connection between the volatility of stocks and the outbreak of epidemics. Is there a direct or indirect cause-and-effect relationship between them? Is it better to cash out of the stock market? Will the stock market climb back to its peak by the end of this year, as more and more countries, are planning to reopen economies?
Quick Market Update
"Stocks are poised by weekly gains but still stuck in limbo," said Paul Vigna, a market reporter and editor in Dow Jones Newswires. "There is so much uncertainty about the outlook for the economy, and the market has not yet found a catalyst to break higher or lower."
According to The Washington Post, after the global stock market experienced a crash that began on February 20 and started rallying on March 24 because of the government aid bill, the market is soaring while the economy is floundering due to the outbreak of the new coronavirus. "The S&P 500 is up 1.8% and the Dow Jones Industrial Average is up 0.6% in the first week of May," Vigna added. The S&P 500 and Dow Jones Industrial Average are stock market indexes that measure large companies' stock performance in the U.S. The ups and downs of these two indexes represent the U.S. stock market at different times and are commonly used to forecast the economy's direction.
According to the Centers for Disease Control and Prevention (CDC), in the post-WWI era, there have been five known flu pandemics, including the Asian Flu (1957-58), the Hong Kong Flu (1968-69), the Russian Flu (1977-78), the Swine Flu (2009-10); and lastly, the current coronavirus that started in 2019. We will next look at four of these events and what the Dow Jones Industrial Average, a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States, reveals to us about these past flu pandemics.
The Asian Flu (1957-58 Flu Pandemic)
In February 1957, new influenza (H2N2) virus emerged in East Asia, triggering a pandemic, also known as the Asian Flu. The first confirmed case of the Asian Flu was reported in Singapore in February 1957, Hong Kong in April 1957, and in coastal cities in the United States in the summer of 1957.
According to past pandemics archive data from the CDC, the estimated number of deaths was more than one million worldwide and 116,000 in the United States. During the outbreak of the H2N2 virus, there were two waves of illness in the United States. MedicineNet's statistics indicate that the first wave peaked in October 1957 among children who returned to schools, while the second wave peaked from January to February in 1958 when the virus became fatal to older people.
The Asian Flu pandemic outbreak brought about substantial economic effects to many countries in the world, including the United States. In the second half of 1957, the Dow Jones Industrial Average lost 15% of its value, according to The Atlantic. European countries like the U.K., Ireland and Germany had to close some of their businesses and schools, similar to today's world under the new coronavirus outbreak.
"The Asian Flu can be understood as a good parallel to the current coronavirus pandemic," said Dharshini David, a stock market analyst, "even though there were other things that happened over that time, but at least there was no world war."
The Hong Kong Flu (1968-69 Flu Pandemic)
The first case of the Hong Kong Flu was found on July 13, 1968, according to the archive data from CDC. In September that year, troops brought the virus from Vietnam to California. According to the CDC, the estimated number of deaths was 1 million worldwide and about 100,000 in the United States.
The chart above begins half a year before the arrival of the Hong Kong Flu, so it is able to show how the Dow Jones Industrial Average performed before the outbreak. "From the inception of the virus on July 13, 1968, to the end of 1969, as the end date is uncertain," said Mike Patton, a certified financial planner from New York, "the Dow Jones Industrial Average lost about 13.2%. At its worst during this period, the Dow was down slightly more than 21.0%."
After the Hong Kong Flu pandemic was almost gone, the stocks proceeded to drop after a quick rebound in June 1969, as a largely unrelated recession took place in 1969-70 on the back of accelerating inflation, according to The Guardian.
The Swine Flu (2009 Flu Pandemic)
The 2009-10 flu pandemic, or the Swine Flu, began March 17, 2009, in Mexico. "At that time," said Patton, "the U.S. was emerging from the 2008 financial crisis, and stocks were significantly undervalued."
Just over four months from its inception, clinical trials for the Swine Flu vaccine began. Marie-Paule Kieny, the director of the Initiative for Vaccine Research at the World Health Organization, claimed that the vaccine appeared both effective and safe, providing a strong protective immune response and having a similar safety profile to the usual seasonal influenza vaccine. The Swine Flu vaccine provided the most significant benefits to youngsters, as many older people are already immune through exposure to similar viruses in the past. In October 2009, the virus peaked in the U.S. before it officially ended on August 11, 2010. "From the start of the virus to its finish," said Patton, "the Dow had risen over 40%."
According to the World Health Organization, the first case of the current coronavirus can be traced to December 1, 2019, in Wuhan, China, and COVID-19 is the infectious disease caused by this recently discovered coronavirus. However, it was not reported until December 31. "With an estimated fatality rate somewhere between the 1918 Spanish Flu (2-3%) and the more common seasonal flu (<0.1%)," said Patton, "the ultimate result of the coronavirus is unknown." At this point, US stocks have fallen into correction territory (i.e., down over 10%). "Nothing we have seen since 1918 even comes close to what is happening," said Sean Illing, a financial writer at Vox. "If this is merely a once-in-a-generation virus, we will be lucky."
According to Illing, in comparing the 1918 Influenza, the Swine Flu, and the current coronavirus, there are two significant differences. “The two major differences are the target demographic and incubation rate,” said Illing. “In 1918, the overwhelming majority of people who died were 18 to 45; over 90 percent of the excess mortality was in people younger than 65. Older people with chronic diseases have a higher risk to infect the coronavirus disease.”
The average incubation rate of Influenza was about two days, whereas the coronavirus's average, as proved by Huo Shen Shan Module Hospital in Wuhan, is 14 days. "This is both a good and bad thing," said Illing, "The good thing is it allows time to contact, trace, isolate, and things like that, which was almost impossible during the influenza epidemic. The bad thing is that that means this virus may stretch out over a much longer period of time and infect more people."
Besides the disease itself, the U.S. stock market, or any country's stock market, will react to each crisis differently, depending on how investors believe the economy, consumers, and corporate earnings will be hit. During the global financial crisis in 2008, markets were worried about the financial system falling apart, hence why shares in banks collapsed. Many banks around the world had to be bailed out by the governments of their respective countries.
"In the U.S. this year," said Daniel Coatsworth, a stock market analyst and editor at Shares Magazine in the U.K., "the current coronavirus crisis initially weighed on share prices because the market was worried about the country's slow response to imposing lockdowns and also how businesses would be supported to preserve jobs." Even though some states in the U.S. have considered reopening the economy, most states have imposed lockdown and social distancing, which disrupted the lives of hundreds of millions of people and the operations of thousands of businesses, according to The Wall Street Journal. "The ultimate fear is that the U.S. is going to experience another recession and that it will take a long time for the economy to recover," said Coatsworth.
By looking at the Dow Jones Industrial Average, a fall in a share price is the market's way of saying that corporate earnings will be a lot less than previously expected. "One direct influence that the coronavirus outbreak brings to the U.S. stock market is that in this year, it is down to investors fearing there will be fewer people buying products or services because they are stuck at home," said Enyue Zhuang, the Deputy Director of National Audit Office Economic and Trading Section in China. The global financial crisis centered on market fears that financial companies were insolvent. "The coronavirus crisis involves market fears that companies across multiple sectors could face a liquidity crisis – namely that they have not got enough cash coming in short-term," Zhuang added.
Timeline (Important dates and stock market reactions)
Here are some important dates of the current coronavirus pandemic and the stock market reactions. All the data and resources are from Yahoo! Finance and Businessinsider.
On December 1, 2019, the new coronavirus was first identified in Wuhan, China.
On January 30, 2020, the World Health Organization declared the outbreak a Public Health Emergency of International Concern.
From February 24 to February 28, stock markets worldwide reported their largest one-week declines since the 2008 financial crisis, thus entering a correction.
On March 9, 2020, most global markets reported severe contractions, mainly in response to the new coronavirus pandemic and an oil price war between Russia and the OPEC countries led by Saudi Arabia. This was known as Black Monday; the Dow Jones Industrial Average showed its worst drop since the Great Recession in 2008.
On March 11, the WHO declared the outbreak a pandemic.
On March 12, there was another drop, Black Thursday, where stocks across Europe and North America fell more than 9%.
On March 20, 2020, Goldman Sachs, an American multinational investment bank and financial services company, warned that the US GDP would shrink 29% by the end of the second quarter of 2020 and that unemployment could skyrocket at least 9%.
On March 23, 2020, the finance ministers and central bank executives of the G20 countries agreed to develop a joint action plan to address the economic effects of the COVID-19 pandemic.
On March 24, 2020, the Dow Jones Industrial Average closed more than 11% up, the NASDAQ Composite closed more than 8% up, and the S&P 500 closed more than 9% up.
As of May 4, 2020, more than 3.5 million cases of COVID-19 have been reported in 187 countries and territories, resulting in more than 247,000 deaths. More than 1.12 million people have recovered, according to the World Health Organization.
By analyzing the text timeline above, it is safe to say that once the market has some reassurance that governments and central banks like the Federal Reserve are doing everything they can to help support businesses, investors will start to have more faith that the liquidity problems are only short-term and the economy will quickly bounce back. "That is why you have recently seen share prices start to pick up, albeit this could only be a temporary action," said Coatsworth. "Unfortunately, it is still too early to call a bottom to the market, and it does seem as if earnings forecasts for companies are still too high."
William Cheung, a stock market day trader, technical analyst, and stock market cash extractor in New York, compared the different reactions of the U.S. stock market during the Swine Flu and the new coronavirus outbreak disease. "From the start of the Swine Flu to its end, the Dow Jones Industrial Average had risen over 40%, which is quite different from what is happening now", said Cheung. "However, I doubt that the Dow can regain its value by the time before the outbreak of coronavirus by the end of this year."
Stock market experts argue that the stock market seems to be too optimistic regarding corporate earnings. "We're potentially going to see a global recession this year, and current equity valuations in the U.S. do not seem to be pricing that in," said Cheung. "It is quite normal to see markets bounce back sharply after a correction like the one we saw earlier this year. However, they can easily come back down again once reality kicks in," Cheung added.
At the same time, in just a few weeks, a decade of jobs has been erased. While the U.S. stocks have started to accelerate since the end of March 2020, the U.S. Bureau of Labor Statistics released April's nonfarm payrolls report, showing the unemployment rate has risen to 14.7%, which is the highest level on record. However, according to The Wall Street Journal, both the Dow Jones Industrial Average and S&P 500 have rallied more than 30% from their March 23 lows.
"The reason why there is such a gap, that the stocks grow, but the economy still looks sad is due to the sharp decrease in consumer spending, as so many businesses were shut down in the U.S.," said Cheung. "Even though we cannot predict the exact tendency, one possible explanation is that the current data on the economy looks bad, but it is bound to improve."
"Many analysts predict that there will be a fast recovery because many states have started to or planned to restart the economy," said Illing. Meanwhile, as the pandemic is getting controlled in China, as many Chinese cities have claimed there are no new COVID-19 cases, the government reopened the economy and many people go back to work. "The only difference between five months ago and now is that people wear face masks when they go outside of their home," said Zhuang.
According to The Wall Street Journal, back in the U.S., New York, which was the hardest hit by the coronavirus outbreak, has begun to develop a plan to reopen its economy. "More than ten states are allowing some businesses to reopen while following social distancing," said Illing. "This makes many investors believe that there will be a rebound of the economy by the first half of the next year."
Other good news is that the new confirmed cases of the current coronavirus have plateaued in the United States, as the outbreak in the United States moves past its peak, and infection rates decline, according to CNBC. "We cannot foresee the pandemic in December 2019," said Coatsworth, "but the good thing is, this epidemic will eventually pass, and there are some small signs showing recovery. Some investors think the sharper the market downturn, the sharper the rebound that may be, but no one can give a correct answer of the future right now."
Besides, many investors said the unemployment numbers and other disappointing data came as no surprise after data in recent weeks showed a flood of people applying for unemployment benefits and waiting for free grab-and-go meals on the street in New York City The Wall Street Journal.
Thus, under the current circumstance, what should stockholders do? "It would be better for people not to cash out of their stock market positions," said Coatsworth. "My advice is to stay calm and not rush to trade your stocks in for bonds, which are doing well now."
Besides, looking at the long term is always the key, as many factors influence the stock market day by day. "I recommend you to look at the long term," said Cheung, "whether anything will be different with the company you have invested in five to 10 years' range. This is more important than being anxious about the data and watching the market every day."
The stock market is affected by many factors, and there are many confounding variables during different periods. Therefore, we cannot assume a direct causal relationship between past pandemics and the U.S. stock market's performance. By analyzing data from the previous pandemics, it is quite normal to see markets bounce back sharply after a correction, but the ultimate result of the current coronavirus is uncertain.
Nevertheless, the consequences of the stock market and the outbreak of flu pandemics are easy to observe. From a macro-level, after many businesses were shut down due to the quarantine requirement in many countries, many people lost their jobs, which caused the unemployment rate to go up, and affected the global economy. Looking at the micro basis, according to the World Health Organization, as the outbreak of the current coronavirus has killed more than 200,300 people all around the world, many people lost their loved ones. The flu pandemic brings about the virus and negative emotions like fear and anxiety, which may negatively affect some stockholders' decisions. The swings of the stock market during the outbreak of a pandemic are understandable, and no matter how hard it is at the current time, the pandemic will ultimately pass.
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